Oil Crisis and the World Economy | Social Issue Essay, Article, Paragraph for Class 12, Graduation and Competitive Examination.

Oil Crisis and the World Economy

Scheme of the essay

Exposition: Many factors are responsible for the continuous soaring of oil prices.

Rising Action: India has been able to absorb the shock because of the rise in exports but the condition of other developing countries is worse.

Climax:

(1) Non-oil producing, developing countries are facing a balance of payment deficit, falling growth rates, and increasing unemployment,

(2) There is a general price pressure in primary commodity markets,

(3) Developed countries are responsible for the oil crisis,

(4) A badly hit developed country is the U.S.A.

Falling Action: A dual-price policy can save the economy of developing countries.

Ending: All the countries of the world should come together to ensure equitable terms of trade for everyone.

Even years after the first price hike announced by the Organisation of Petroleum Exporting Countries in 1974, the non-oil producing countries do not seem to have quite adjusted to it-there is a panicky reaction to every price increase by the OPEC and practically no reaction to monopoly profits of international oil cartels or domestic taxes on the sale of oil products. Inflation continues to rage in developed as well as in developing countries. The consuming countries are taking very few steps to restrict the use of oil; the OPEC countries are not willing to increase the production of oil and as a result, spot market prices of oil continue to soar.

The average import price of crude oil for India has risen tremendously. Fortunately, India’s exports had been rising in the previous years which enabled her to absorb the shock to a greater extent; if exports had not been rising at the present consumption rate of oil, India would have been paying more than 75 percent of its export earnings for the import of crude, which for a developing country like India is still an enormous proportion.

However, almost all the non-oil producing developing countries, because of the periodic increase in the price of oil, are facing a balance of payments deficit, falling growth rates, increasing unemployment, and other economic crises. Soft loans from various sources are of no help for the future repayment obligations of the developing countries.

But the same cannot be said for the developed countries. Their economy had been feeling under inflation when the first price was announced by the OPEC countries. As the well-known American Economist Lawrence Klein observes: “The major economies of the world were entering a restrictive phase during the latter half of 1973 because they had uniformly run into inflationary pressures. These stemmed, principally, from two sources. First, there was pressure on capacity. The indexes of utilization were at cyclical high points in several countries simultaneously. Second, there was widespread speculation and general price pressure in primary markets. In addition to the manifestation of inflation resulting from primary (agricultural) commodity price rises, there was a tendency in some countries for the trade balance to deteriorate. This was particularly severe for the United Kingdom, where the dependence on imported materials is quite large.

“To curb inflation and trade deficits many industrial countries have imposed restrictive monetary and fiscal policies. There may have been nothing more serious than a growth recession had there not been the simultaneous shock of the embargo hitting all the oil-importing countries. It is not unusual to have the shock of induced upper turning points in the business cycle. The industrial economies were slowing down to the point of being vulnerable to the effects of such a shock as, in fact, occurred when the OPEC countries embargoed oil exports in October 1973.”

A major portion of blame for the world oil crisis lies on the shoulders of the developed countries who are concerned more about their economy, preserving their standard of living at the cost of the developing countries. Prior to the oil embargo and subsequent price hikes, the OPEC countries were as under-developed as any other developing country of today. They were treated as suppliers of cheap raw materials like any other developing country.

Just as developed countries had been interested in buying cheap copper and rubber so they have been interested in cheap oil without any quid pro quo to the developing countries. None of the developed countries has been interested in developing the economies of the underdeveloped countries including the present OPEC countries prior to 1973. On the contrary through the operation of multinational corporations sold finished goods at very high prices to the developing countries. This led many Third World economists to conclude that the international trade between developed and underdeveloped countries was carried on unequal terms of trade which needed to be reversed. But the developed countries did not listen.

Then it was agreed at the United Nations that the developed countries will contribute one to two percent of their gross domestic product annually for the development of the underdeveloped countries. This had also been never realized. On the contrary, their contribution has come down from the peak of 0.7 percent to about 0.3 percent of the GDP. Thus it was the intransigent attitude of developed countries which forced the OPEC countries to retaliate. In this retaliation, the developed countries have been facing economic crisis but the most badly hit had been the developing countries. Firstly, along with the developed countries, the developing countries have been forced to pay the increased price for oil. Secondly, the forced redistribution of wealth through oil price hikes has not benefited all the developing countries but the oil-producing developing countries only.

The badly hit developed country has been the United States where the depression of the thirties was haunting the people. But the developed countries do not appear to have learned the lesson. They are doing nothing to save the dollar from depreciating with the result the OPEC countries are raising the price of crude further to save their real earning.

Such a confrontation can only lead to economic crisis in almost all the countries of the world. The only way out is that some correspondence be established between the prices of oil and other raw materials from the developing countries and the finished manufactured goods from the developed countries. The value of the dollar and other international currencies must be established and finally, the developed countries must reconcile to the fact that they cannot go on for long to maintain the high standards of living of their people at the cost of developing countries.

At the same time, the OPEC countries must realise that they cannot go on punishing the other developing countries for the wrong done to them by the developed countries. Some kind of dual price policy or reimbursement of excess money to developing countries on the purchase of oil can save the economies of the developing countries from falling into a deep economic crisis.

Thus it is high time that all the countries of the world come together to work out a policy which ensures equitable terms of trade for everyone and no one tries to develop at the cost of the other. Unless this is done urgently it would deepen the world economic crisis.